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Despite Default Fears, Argentina ETF Soars

Shares of the Global X FTSE Argentina 20 ETF (NYSE:
ARGT
) are soaring by nearly 3.6 percent today despite fears the
country is inching closer to another debt default. Following a
late October ruling by a U.S. court that said Argentina could not
discriminate against so-called holdout bondholders, the
government of South America's third-largest economy is left with
unappealing options.

The "holdout" creditors are those that did not participate in
Argentine debt restructurings in 2005 and 2010 following the
country's 2001 default,
according to The Economist
. The holdout group includes U.S.-based hedge fund Elliott
Associates.

Viewing the holdouts as taking advantage of Argentina's
precarious financial state, the government risks losing political
capital by acquiescing to holdouts' demands. If the government
does not pay the holdouts, it runs the risk of opening the door
to new claims by restructured debt holders, according to The
Economist.

Should Argentina opt to not transfer funds to New York for its
next bond payment due December 2, the country would be in
selective default. The other option, changing the terms on
restructured debt and transferring funds outside the jurisdiction
of the U.S., would force a technical default, The Economist
reported.

None of these scenarios are particularly appealing for the
embattled Global X FTSE Argentina ETF. ARGT has lost nearly 28
percent year-to-date. The bulk of those losses can be attributed
to
to the perception of elevated political risk
by foreign investors and Argentine government's harsh anti-free
market rhetoric.

With the 2001 default and the nationalization of YPF (NYSE:
YPF
) earlier this year still fresh in investors' minds, Argentina
can ill afford to renege on its debt obligations again. Few
ETFs
offer any noteworthy exposure to Argentine bonds, so despite
ARGT's diminutive stature, the fund could be a favored tool for
some traders looking to short Argentina.

Today's bounce in the ETF appears to be the work of technicals
as the $7.75 area is represents a double bottom zone for the
fund. Volume is also light at less than 600 shares, indicating
there is little veracity in this rally.

What is clear is that traders view another Argentine default
as a real possibility. Based on credit-default swaps, the implied
probability that Argentina will renege on its debt over the next
12 months has now surged to 63 percent,
Bloomberg reported on Friday
.

Argentine sovereign debt was spotted yielding nearly 100 basis
points more than Greek equivalents last week. The two embattled
countries share another dubious trait in common: The very real
possibility of losing their respective market
classifications.

Index providers MSCI (NYSE:
MSCI
) and FTSE Group have placed Greece on their respective lists for
possible downgrades to emerging markets status.

MSCI said in June it had Argentina on review for possible
downgrade while FTSE Group made a similar announcement in
September.

"Argentina is listed for possible demotion from Frontier due
to continuing stringent capital controls imposed on international
investors and the perceived lack of an independent regulatory
authority to protect the rights of shareholders," FTSE said in a
statement. "Argentina was demoted from Secondary Emerging to
Frontier in 2010."

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